Saturday, October 30, 2010

An Article About Politcs Worth Reading

Mr. Baird had developed his own health-care proposal that drew on his 23 years of experience as a licensed clinical psychologist treating patients with cancer and brain injuries. His plan would have provided universal health care but held down costs through vouchers for the poor, medical savings accounts for the middle class, and reform of malpractice insurance.

He admits to being frustrated that ideas like his never got a fair hearing in a Congress dominated by inertia and interest groups. "Our problems are now so grave we can't afford petty partisanship and closed thinking," he tells me. ...In his new book, "Character, Politics and Responsibility," Mr. Baird argues that in order to afford caring for the needy, liberals will have to challenge "unsustainable entitlements." "I would eliminate the concept of entitlements and move to needs-based social insurance," he says. "The key is to both promote personal responsibility while lowering expenditures by not promising or giving money or other benefits to those who don't need it."

I'm going to buy this guy's book. He blames a lot of this on Pelosi's management style, which is what I have been thinking all along. The focus on Obama is misleading. Obama is still far more popular than Congress, and his numbers remain pretty good given the economy. The focus on Obama seems to be generated by a Congress intent on deflecting blame rather than facts. It is almost the mirror image of what occurred in the GOP Congress.

After reading the article I had two thoughts:

A Democrat like this is not very far from TEA Party.

It is utterly depressing that a Democrat like this chucked it.

I truly believe that a good chunk of persons attracted to the TEA party are traditional Democrats rebelling against a dysfunctional party leadership, just as many of the TEA enthusiasts are traditional Republicans rebelling against a dysfunctional party leadership. This is a strange way to reach bipartisanship, but it seems as if the parties kind of forced this on the voters.

Baird's advice to the next Congress? Be honest about the numbers and treat the voters like adults.

I have no idea whether the next House will follow that advice, but if it doesn't, I think the voters will continue to "throw the bums out".

Friday, October 29, 2010

Table 10 and Table 3 For Halloween GDP Release

Headline is 2.0%, which is just fine. It gets a bit ugly when we look at the numbers, but first a caveat - Q3 was greatly assisted by the extension of unemployment benefits. Numbers below are seasonally adjusted billions.

Table 3 - Level and Change.GDP in total: +65.8 up from Q2's 56.1.

Personal Consumption (note that consumption is driving growth):Total: +58.9, up from Q2's 50.2Goods: 22.4 down from Q2's 27.2Notable here is the food/gas reverse from Q2. Gas spending rose then while food spending fell; food spending rose this quarter while gas consumption fell. In general, the economy is growing healthily when both categories rise. If not, almost without exception a substantial percentage of consumers are pressured for money and trying to conserve cash, which does not bode well for more discretionary spending.Services: 36.7 way up from Q2's 23.8There was a healthy increase in recreation but a big drop off in financial services and insurance.

Gross Private Domestic Investment:Over the long term, this category drives the economy.Total: +54.6 down from Q2's 101.3.Fixed: +3.5 down from Q2's 72.0. Oops. All categories were weak, but the major variation was in fixed residential, -28.8 compared to Q2's 19.4. However nonresidential, while positive, came in at 31.9 vs Q2's respectable 52.7.Virtually all GPDI growth this quarter came from growth in nonfarm inventories which grew 48.9.

Right there one's eyebrow would raise. I think we will not see much of an inventory blowback in Q4 (see Chicago PMI) and I also think the dropoff in residential building has troughed this cycle. Yet one cannot ignore this. This is suggesting that consumption is all that's moving the economy right now.

And, since consumption is what moved the economy forward in Q3, naturally we skip right to Table 10, Personal Income and Its Disposition:The very first thing I want to look at is the relationship between PCE growth and growth in wages and salaries. In Q2, wages and salaries disbursements increased by a bit over 50 billion, which was very close to the PCE increase. In Q3, wages and salaries disbursements increased by a bit more than 38 billion, which is unfortunately significantly below PCE growth at 58.9. That big a miss is not sustainable over the long term.

Over the short term, it can be done if government transfer payments support consumption.

In Q2, government transfer payments increased more than 41 billion. In Q3, they increased less than 24 billion. So the squeeze is on.

But there is also investment income and so forth. At the bottom of Table 10 you will see a 2005 chained dollar (real) line that gives the trend in personal income ex government transfer payments. Between Q1 and Q2, the increase was over 76 billion. That easily accounts for PCE growth and left us some. Between Q2 and Q3 the increase was a measly 15 billion.

Of course, if people earn more they pay more in taxes. This is good for the government, but one should correct for that. The last line in Table 10 gives disposable current income (income less taxes) in chained 2005 dollars. From Q1 to Q2, disposable current income grew 110 billion dollars! Unfortunately, from Q2 to Q3 disposable current income grew less than 14 billion dollars.

Now, this means that we have tightness ahead. Inducing rapid inflation in "needs" categories is not the way to fix that curve. It could in fact shift disposable current income in real dollars to the negative.

That's the Fed suicide curve, and I am hoping that they will say "hah - hah, just kidding" next week, and claim that it was just some spooky Halloween Haunted House-type fiscal trick. The only thing the Fed can currently accomplish this way is to squeeze company margins more (see the Prices Paid table in Chicago PMI on page 2) which will tend to constrict employment growth, and then you will have a double negative on real personal income. It is real personal income that matters.

Nor will raising taxes on most individuals or businesses help. That's the WTF suicide curve. Currently it is also the Dem plan, which has a great deal to do with how this election cycle is playing out.

Only time is going to help this.

In response to Sporkfed's comment in the previous post:1) Your point is well-taken. I think this post sets out very clearly your contention.2) However, the glorious thing known as "bankruptcy" is the factor to consider. Either consumers will continue going bankrupt in droves or CC companies are going to have to get serious about segmenting their portfolios, cutting rates for customers who are likely to pay the debt down, and junking the rest. CC companies are already taking a bit of a beating as relatively high CC rates cause better credit prospects to try to consolidate off their CC debt, which leaves CC portfolios in an adverse sort scenario.

It's not just income - it's also income less debt repayments. Disposable current income cannot increase very quickly, but debt repayments can be adjusted down and free more income for consumption. There is already a bunch of mythical mortgage debt being written off. Now it is time to clear the bad consumer debt. I hear radio ads for consolidation loans already.

Thursday, October 28, 2010

This May Be Too Bizarre Even For Jokes

So, did you hear about the Costa Mesa realtor with the heart of gold? Befriended homeless people and even allowed one women to sleep in a car she was driving. Loved her so much, in fact, that when the lady died she just kept driving her corpse around in the car.

PS: There's a story to every photo, but this is one of the odder ones to come out of the Oval Office. Look closely. Ol' Joe and Babs there on the left appear to have been doing the Monica under the desk or something of the sort. This is proof positive that bloggers should stay behind the Screen of Anonymity.

Sure 'Nuf

I have been desperately crunching numbers and stepping up the retail survey.

And over the last ten days there is clear drop in the retail survey. It won't show in the official numbers because consumers are shopping very early this year for Christmas, which will distort the seasonal reporting. But underlying retail is busting hard on gas and inflation.

In short, the Fed is committing a massive error, and if it tries to carry forward its asset-buying plan it will almost certainly produce a new contraction.

As it stands, we are now in a very solid recovery (or were, before the Fed got all antsy). It would not have looked like it until almost the beginning of the third quarter next year, because the economy is now absorbing the impact of the state and local government fiscal disaster and the large number of unemployed people who are losing their benefits as they run out their 80-99 weeks.

Nonetheless, the floor has continued to firm, and we would have shifted into nicely solid growth (in the mid 2's) next summer.

But the Fed has already cut a group of consumers off at the legs, and depending on its stubbornness, it may completely destroy this "virtuous" cycle. This cycle would have had some staying power because consumers have sharply shifted their behavior and are more conservative, so they are not building up deathtraps for themselves and the economy.

Today's low headline initial claims number doesn't mean anything. It is the product of the normal October seasonal adjustment choppiness. This year they are very choppy indeed. You can see seasonal adjustments for years on end at this link by pulling the report for the years you want. Still, the four-week moving average is pretty indicative, and its continued slow decline is telling us something real about the economy.

The current retail trend is going to hurt some chains badly. The combination of much higher stocking and poor late-season performance will make February a very sad month.

Sunday, October 24, 2010

FCIC

This organization (Financial Crisis Inquiry Commission) is bringing its scheduled activities to a close. I have been reading a lot of the testimony, and I thought others might be interested. This page gives you the index to the hearings, and you can click on each hearing and read the testimony. All the hearings are worth reading. The stuff below is from day 1 of the Subprime Securitization stuff.

The Definition of a good loan changed from, “One that pays” to “One that can be sold”. The loans were no longer held by portfolio lenders, but sold to investors, most of whom placed them into securities.

And who could possibly have imagined that this could be a problem?

I was compensated with salary plus bonus based on company performance with part of that being discretionary based on personal performance. The compensation was significant for the top producing salespeople, some of whom were making several million dollars a year. Many of the sales managers and account executives lacked any real estate or mortgage experience. They were missing the depth of experience necessary to make an informed lending decision. These same sales mangers had the ability to make exceptions to guidelines on loans, which would result in loans closing with these exceptions, at times over the objections of seasoned appraisers, underwriters or risk personnel....At the end of the day, we had a system that went into a downward spiral because of layering risk rather than offsetting the risk because there was such a huge demand for the products. Our loans were sold before we even made them, which put more pressure on the production groups to get loans closed. Wall Street packaged and sold the Residential Mortgage Backed Securities to unsophisticated bond buyers/ investors. By unsophisticated, I mean they did not understand the true risk of the underlying loan product. The process was so convoluted it was nearly impossible to get a fraud loan pulled out of the entanglement to repurchase it. I actually had a Wall Street investment banker chastise me for trying to buy a fraud loan back.

During my tenure, Market Risk assessed potential exposures in a variety of ways, including through the use of stress tests, which employed assumptions using historical data to stress for potential loss....These marks reflected the widely held belief—both within the Company and throughout the market—that the super-senior positions bore almost no risk of loss. As the unprecedented market events unfolded in 2007, and new issuance of CDOs froze, the business developed a model to price its super-senior positions based, in part, on an intrinsic cash-flow methodology of the CDO’s underlying RMBS collateral....Indeed, given the widely held view that the super-senior positions posed only an extremely remote risk of loss prior to the unprecedented events of 2007, it is still difficult to imagine how the severity of the decline in house prices – and its effect on the CDO market – could have been predicted, let alone modeled.

This is wild stuff. If you stress test based on no-loss assumptions, you will not come up with risk predictions. That much is true. But if you look at cash-flow assumptions to model, you'll come up with a very different picture.

These loans were nothing like mortgage loans issued before, yet the "Risk" assessment was performed using assumptions gleaned from properly underwritten loans. Amazing.

The same methodology is now being used by those who claim the Social Security and Medicare Trust Funds are assets. Some people never learn, although it is a tragedy when a person whose profession is to assess risk cannot even perceive his error in hindsight.

If you read through this stuff, you will slowly gather the picture that almost without exception, the idiocy of explanation and an inability to perceive error is positively correlated with higher positions in the, shall we say, "prestige ladder".

And if you don't believe that, end with Greenspan's testimony, which should live in everyone's memory as an epic example of Fed-Gone-Bad. There is so much complete nonsense in this one pdf that someone should write a book rebutting it line by line. If you read Greenspan's testimony and don't see the glaring falsehoods, then read Bitner's testimony. Notice that while both begin in the 1980s, one is discussing pertinent events and one is blowing smoke.

In a microcosm, this is what has gone wrong in our society. The further up you are, the less you know and the less responsibility you will take for your actions.

Update: Please also see today's post by Shrinkwrapped on the topic of disconnected elites. I love a man who resorts to the US Census to get numbers. However even if you do not, his basic argument is valid and may well go a long way toward explaining the oddity that I have been contemplating while reading through the FCIC hearings. My thesis is that the current Ivy culture is one that teaches irresponsibility.

As two dozen years at Yale and Columbia have shown me, elite colleges relentlessly encourage their students to flatter themselves for being there, and for what being there can do for them.

...

The second disadvantage, implicit in what I’ve been saying, is that an elite education inculcates a false sense of self-worth.

He then goes on to discuss the training in responsibility:

An elite education not only ushers you into the upper classes; it trains you for the life you will lead once you get there. I didn’t understand this until I began comparing my experience, and even more, my students’ experience, with the experience of a friend of mine who went to Cleveland State. There are due dates and attendance requirements at places like Yale, but no one takes them very seriously. Extensions are available for the asking; threats to deduct credit for missed classes are rarely, if ever, carried out. In other words, students at places like Yale get an endless string of second chances. Not so at places like Cleveland State. My friend once got a D in a class in which she’d been running an A because she was coming off a waitressing shift and had to hand in her term paper an hour late.

That may be an extreme example, but it is unthinkable at an elite school....In short, the way students are treated in college trains them for the social position they will occupy once they get out. At schools like Cleveland State, they’re being trained for positions somewhere in the middle of the class system, in the depths of one bureaucracy or another. They’re being conditioned for lives with few second chances, no extensions, little support, narrow opportunity—lives of subordination, supervision, and control, lives of deadlines, not guidelines. At places like Yale, of course, it’s the reverse. The elite like to think of themselves as belonging to a meritocracy, but that’s true only up to a point. Getting through the gate is very difficult, but once you’re in, there’s almost nothing you can do to get kicked out. Not the most abject academic failure, not the most heinous act of plagiarism, not even threatening a fellow student with bodily harm—I’ve heard of all three—will get you expelled.

What the professor is describing is a system that trains people to be irresponsible and expect not to be held accountable.

Thursday, October 21, 2010

Poor Juan Williams

Okay, the reason I have been silent so long is that I got the flu, and then the Chief got the flu from me, and I couldn't really get over the flu because I was fighting to keep the Chief in bed. He tends to try to outrun viruses. It's as if he somehow believes that if he picks up enough velocity, a relativistic phenomenon will occur and abruptly he will find himself going back in time to BEFORE THE CONTAGION.

Plus, poor SuperDoc is being audited by a bunch of Medicare Advantage providers. I suspect it is because he is daring to treat his patients, and he gets a lot of them with weird or complex illnesses. I have an ocean of work in front of me.

In the comments below I see that Angry Saver is insisting that debt owed to oneself is money. I will take up that fallacy later. Tonight, I just want to tell a story on myself that may generate some compassion for Juan Williams.

But before I tell that story, I noted that the head of NPR said that Juan Williams should keep his opinions between himself and his shrink, so of course I burst out laughing and raced over to the Shrink's place, and he has duly written a post regarding the Fox Faux Pas.

On to my story:

Regular readers know that I have a neurological disease. Although mostly better now, for the vast majority of adult my life I have been subject to sudden paralysis. This most often occurred whenever I was hot for a while, with plenty of blood pumping through my muscles, and then suddenly was cooled down. And it could be utterly crippling.

So, as a consequence, I am one of the most modest dressers in warm weather you will ever find. In particular, if I am going to have to be somewhat immobile in an air-conditioned space, you will find the M_O_M creature wearing head-to-toe loose layers. This is especially important when traveling, because there is nothing worse than charging through a 100 degree parking lot and then being trapped for several hours in an airline seat, immobile, with drafts blowing on your bare skin.

Although in my case this is not a religious practice, I am sometimes mistaken for a Muslim by Muslims because of it. Non-Muslims might think that the Koran requires the burka, but it doesn't. It does, however, dictate covering up and loose clothing. Therefore western Muslim women and I have a somewhat similar dress code, which is only likely to be perceived by Muslims as being typically Muslim.

It is possible that TSA training is better than most think it is, because I also find myself being yanked out for the body searches quite a bit at airports now.

A few years back, I was waiting for a plane to Jacksonville, FL, garbed in my normal layered look, and while I waited, I prayed the rosary. I often pray the rosary, but when I do it in public I tend to do it inconspicuously. I usually have the rosary in my lap or sort of in my pocket, and I do not speak the prayers aloud. I mouth them to myself.

I noticed that I was being stared at by a dark man while we were boarding the plane.

As luck would have it, it turned out that the dark man and I were sitting next to each other in a set of seats next to an emergency exit. I had requested the window seat and chosen an exit row, because they are roomier. He appeared somewhat startled and nervous, and offered to change seats with me. I declined politely, because I really like to look out the window when I fly.

He appeared consistently nervous, and I became concerned and asked if he were all right. He was sweating and glancing around, and I was wondering if he might either be ill or perhaps feeling signs of an incipient heart attack. That seemed to thaw him a bit - he disclaimed any illness, and we began talking.

He began to ask me a bunch of questions, and it turned out that not only were we in similar lines of business, but that we had even worked for the same large international consulting firm at different times. It ended up being the most enjoyable flight I had ever had, since we were chatting about business and got into hilarious management misadventures.

I also found out why he had been so concerned.

He was Muslim (originally from India, naturalized American). He thought I was Muslim. He was concerned by my behavior in the terminal, and then appalled to find himself sitting next to a possible terrorist fanatic who was probably going to rip the emergency door open in flight, or perhaps set off a bomb to cause an explosive decompression. The eye-rolling and sweating and glancing around was probably him trying to figure out what to do. If he had seen an air marshal, I'm sure he would have tried to get the marshal to take me into custody.

So, let's just have a little compassion for poor Juan. It is not only non-Muslims who are concerned about Islamic terrorism. It is, after all, mostly Muslims themselves who have been in the middle of the violence, and most of them are not anxious to disappear in a cloud of bloody particles.

The man I unwittingly scared half to death was a frequent traveller. I suspect he and Juan Williams might have a very interesting conversation if they ever find themselves seated together on a plane. I do not think Williams is a bigot for saying what he thought. Nor do I think his thoughts themselves are bigoted. My travelling companion that day wasn't a bigot. He was merely an innocent man who wanted to live.

It would be bigotry if Williams wanted Muslims to be prevented from travelling. It would be bigotry if Williams thought Muslims should all be thrown out of the country. It is not bigotry to simply be concerned about a genuine danger.

Friday, October 15, 2010

Retail Sales Plus

Okay, so the headline is +0.6% (+/- 0.5%) over August, and 7.3% over September 2009. Which sounds good enough. That, however, does not adjust for inflation which in fact does exist already.

With energy prices soaring, now is the time to revisit some history courtesy St. Louis Fed Fred:The thick blue line is real retail sales.

And real retail sales are being controlled by energy prices.

Consumers can't borrow, so they are reacting by indexing their discretionary spending to their daily and weekly "must" spending.

This means that final demand will be quite weak next year.

Whatever brilliant academic theorizing lies behind the Fed's current currency wars, the reality is that US consumers are going to be very much the losers. They can't go out and get extra work to fix the family finances. They can't or shouldn't be borrowing to compensate for increases in their "needs" spending.

Lord knows they won't be borrowing off the equity in their homes. So they are going to cut back hard on their basic spending in order to compensate for expected inflation. Less money circulating = constrained job growth and less money circulating.

The Fed is unable to inject money into the economy in a way that circulates it through the economy, which is what would be needed to counter deflation.

Update: I didn't look at the Michigan Consumer Survey today, because I was doing other things. But here's an article about it:

The survey's barometer of current economic conditions was at the lowest level since November 2009. ..."Personal financial expectations were near their all-time low, and the steep decline in buying plans was related to uncertainty about consumers' future income prospects," the survey's director Richard Curtin said in a statement.

This is not good news if you are a retailer. So I offer this as supportive evidence of my post. Consumers are going to overreact and try to build themselves a cushion when they see prices going up on food and fuel. Many are genuinely afraid of being cold and hungry, and even those who are not just mentally adjust their future expectations down.

Thursday, October 14, 2010

Proof That The Fed Has Gone Crackers

Last week's initial claims were revised from 445,000 up to 449,000, and this week's are starting at 462,000. The four-week moving average is 455,750. We have dropped substantially from the school-system related late summer surge in initial claims.

Of course, with job creation still running quite low claims at these levels do not offer much hope of any real reduction in unemployment rates. Continuing claims are over 1.2 million down from last year's level. But that only accounts for the first six months. Extended and EUC beneficiaries are substantially higher than last year's level, and those numbers are reduced by some who have run out their 99 weeks of benefits (or the lower numbers for states with lower unemployment rates).

The employment base, which is adjusted about quarterly based on reports from state UI databases, dropped again in October. The previous number was 126,763,245, and October's total is 125,845,577. The peak in this cycle was the October 2008 number of 133,902,387. So yes, that is more than 8 million jobs lost. Self-employed and contractors are not included in this number.

You can pull as much history as you want for claims, continuing claims and the job base at this link. I wouldn't recommend fooling around with this data right now if you are in a depressive frame of mind, because the jobs base now is lower than the jobs base reported for October of 2000, which came in at 126,084,568.

The job base continued rising right through the 2001 recession until it peaked in the first quarter of 2002 at 128,673,493. The base then dropped very slowly to a cycle low of 126,084,041 in the second quarter of 2004, rose very slowly through the rest of 2004, and picked up a much better expansion in 2005. We surpassed the previous peak in January 2006 at 128,767,336.

So there is much precedent in our service-related economy for the peak during recession and a long drift downwards after the official end of the recession. But there is no precedent at all (ex depressions and panics) for what we are now facing, which will be a rebound to previous peak job base of five to seven years at best, and right now it appears we may not achieve even that.

A ten year period with a net decline in jobs, and a net decline in jobs from the last cycle low to what may or may not be this cycle low. It's daunting. There's a lot that the unemployment rate doesn't tell us.

Compared to 1991:The peak job base was reached in the third quarter of 1991 at 106,333,000. From there the low came in October 1992 at 104,563,780. In the recovery we made up the lost jobs by April 1994, when the jobs base was reported at 106,627,055.

Perhaps a better measure of economic weakness is the brawl taking place in groceries as profit margins erode and shoppers seek bargains. Safeway is another casualty.

To me it appears that this is proof that the Fed can only do harm by trying to inject money into the economy. Since I unfortunately had to look at the depressive numbers to get this far, I think I will expand on this in a second post. It's time to go exercise or drink a lot of coffee or something like that before the Fed drives ME crackers.

I have been following this story for months, like so many others. I think the last few hours for the waiting families must be sheer torture. They can only bring out about one per hour.

Ah well, it's truly a happy day and a half. Here's hoping everyone will endure the trip to the surface without too much trouble and that the family members can stand the last few hours of tension. Last weekend I was praying for the families, because I thought they must be about worn out.

This is a great thing for Chile and for the world, which is in something of a dark time.

I suppose on utilitarian grounds one would claim that too much money has been spent per man, but the alternative is unthinkable and there is such a thing as the human spirit. Chile as a country will be vastly the better for this, and I think they are setting a great and hopeful example for the world. They got cooperation from just about everyone with expertise who could possibly help. It is a very impressive feat of engineering.

It is also a very impressive feat of human tenacity and the triumph of reason, hope and tolerance over the darker aspects of the human psyche. The miners are an extraordinary group of people to have come through this.

I bet NASA is indeed interested. Supposedly they consulted on some of the details, but I bet they desperately want to understand what it was about that group of men that allowed them to do what they did and hold together as a functional unit.

Tuesday, October 12, 2010

Another Awful NFIB Small Business Survey

This should not surprise anyone, given the regulatory numbers we have been reviewing.

But the October NFIB Small Business Survey is certainly daunting. Positive profit trends -33. Again, many more business owners had to cut prices than could raise prices. This has a lot to do with the poor profit outlook. Higher nominal sales in the last three months came in at -17. Capital spending over the last six months is just 1 point above the 35 year low. Three month hiring plans are ugly too - unadjusted, 16% plan to cut jobs and 8% plan to increase jobs. After seasonal adjustment it is still negative by 3%.

The yammer about small business credit seems pointless based on this survey. Credit demand is mostly restricted to those seeking to cushion cash flow rather than those seeking to expand.

If the Federal government wants to help small businesses, the Federal government should cut regulation and small business taxation substantially. Some businesses out there want to expand, and taking the capital risk is a lot more attractive when you expect higher after-tax profits.

I have noted chipper commentary in the press recently on how well socialized economies with high taxes such as Sweden are doing. Sweden and Denmark embarked on reforms, and for that matter so did Finland. Their corporate tax rates cluster around 25%. Germany keeps reducing its corporate tax rates, with most businesses capped at around 30-33%, and that includes the LOCAL TAXES AS WELL. Contrast that to the US, where state, local and federal corporate tax rates next year in many states will amount to about 50%.

Americans are in denial about why our economy is not competitive. Most of the industrialized world embarked upon a series of competitive reforms over the last decade. We did not.

If Americans want socialism, they will have to go to the Sweden/Denmark model at which individual tax rates will be well over 50%, but corporate tax rates will be more toward 25%. But somehow, I don't think Americans want that. If not, Americans are going to have to figure out what they do want and how to pay for it.

And if what we want is really jobs, then we are going to have to launch a comprehensive reform plan and stick to it. The "green jobs" stuff is mostly nonsense, and almost all of these programs eliminate 3-4 jobs for every job created.

Friday, October 08, 2010

This Was The Employment Report No One Wanted

The worst thing about this one is that it contains the preliminary adjustment backward, which comes in at -366,000 nonfarm. Total private -371,000, with the major overcount in manufacturing (-114,000) and trade, transport & utilities (-144,000), but hospitality took a whack also (-91,000). Government +5,000. These are the revisions to the establishment survey. To take a look at the table go here and scroll all the way down.

Table A summary. This is not as bad as the whole report sounds. Total employment rose by 141,000, although the workforce grew. We are not gaining jobs quickly enough to ratchet down the unemployment rate even though a lot of people are retiring.

Table B summary. The headline is -95,000 jobs, but private sector is reported up 64,000. Government lost 159,000 jobs. In contrast to the summer, quite a bit of the government job loss came from localities (teachers and education, I would expect). In July government job losses were reported at -183,000, and in August they were reported at -150,000. Over the next two years I am expecting substantial further state and local job losses.

U-6 rose to 17.1%. That is a pretty sharp increase from August's 16.7%, and yes, that is seasonally adjusted. However, U-5 has been flat at 11.0% since May. U-6 bottomed at 16.5% in June and July, and has since risen over half a percentage point. The difference between U-5 and U-6 is that U-6 includes involuntary part-time workers, so this is more related to the inventory cycle than anything else. U-4 also hit its floor of 10.2% in June and July and came in at 10.3% in August and September. U-4 is standard unemployment plus discouraged workers. So while the standard unemployment has just edged up 0.1% in August and September, we are definitely not making any progress on the long-term unemployed problem. U-2 (job losers and people who completed temporary jobs) has risen 0.2% since the summer, Its low was June-July at 5.9%. In August, 6.0%, and in September it rose to 6.1%. That is almost surely the state and local government.

The old folks (scroll down and look at the right column) continue to increase their labor force participation. Currently 22.7% of the 65 and older crowd are in the workforce (employed or actively seeking employment). That is a very high number, because obviously the 75 and over crowd have very low participation rates. Over the course of the year, this population gained over 300,00 jobs. But this comes at a cost to teens. (Scroll down and look at the first column and the third column.) Teens have lost more jobs than the oldsters have gained.

Last, but not least, my favorite Household Survey Table A-8. This table shows a sharp seasonally-adjusted rise in part-time employment (+612,000) for economic reasons (i.e. involuntary) from August to September. It is hard to argue with that due to the figures on some industries we have been seeing. What has me going however is the sampling of government/private wage and salary workers. In contradiction to the Establishment Survey, the Household Survey showed a GAIN of over 350,000 government wage and salary workers between August and September, and a LOSS of 279,000 private sector wage and salary workers.

Here is where I sometimes resort to the ADP employment report. Although I think there are some seasonal adjustment problems in these numbers, in fact ADP is showing a similar trend. The definition of "employment" used in the Household Survey is very broad (basically any work done for pay that week), and sometimes when you ratchet it down to the wage and salary workers you get a clearer picture. I think perhaps this month Gallup and ADP are telling us something - that private sector employment is weaker than we thought.

Retail hiring intention surveys are strong, so maybe we'll get better numbers in December and January.

The Establishment Survey really isn't reliable at times like these over a couple of months. However, the one thing I think I can safely say is that we haven't reached the point at which the B/D adjustment is undercounting substantially in Establishment yet. Establishment is always lagging trend with those adjustments. Another thing to watch to catch the Establishment survey lag (when it happens) is the NFIB Small Business Survey. When that turns up sharply in the early stages, usually Establishment is lagging.

The most disadvantaged of all by federal regulations are small manufacturing firms.

and

This study provides a broad sense of the costs of federal government regulations in the United States and how they affect the balance in public versus private sector responsibilities. In 2008 federal regulatory compliance absorbed about 14 percent of U.S. national income, a clear indication of what citizens give up in exchange for this government function.

A quote from page 63:

The regulatory burden is distributed most evenly with respect to firm size in the services sector, as summarized in Table 17 and displayed in detail in Table 16. In the services sector the total cost per employee for small firms is only 13 percent larger than the cost in medium-sized firms, and 9 percent less than the cost in large firms. In the trade sector, small firms face a 15 percent heavier cost burden than large firms, but have a 13 percent cost advantage over medium-sized firms. In other words, within the trade sector, the heaviest cost burden falls on mid-sized firms.

The service-heavy structure of the US economy has come to be, IMO, largely because of our regulatory structure.

A quote from page 62:

The disproportionate cost burden on small firms is dramatic for the manufacturing sector. In that sector the estimated cost per employee for small firms is 110 percent higher than in medium-sized firms ($28,316 versus $13,504), and 125 percent higher than in large firms ($28,316 versus $12,586).

The Fed is trying to stimulate manufacturing by driving down the dollar. In the process, they are going to cut real incomes substantially. And they won't succeed, because it takes too much money to start up these businesses.

Carl included some graphs from the data in the report. Here are a few of my own:The SBA has been commissioning these reports for years. Here is the time sequence with costs allocated to each household.

Red = costs, Green = total federal receipts, Yellow = sum of both.

Note that the yellow is remarkably stable over the period compared to the regulatory costs. This is probably because of lost jobs - the more regs we slap on, the less jobs we have, the less tax receipts on average.

This is the ratio of costs to tax receipts. As regulatory costs keep rising, you can expect tax receipts to be depressed.

Move the red line down and the green line will rise. Since we were not reeling around choking on toxic fumes in 2000, I think we can safely cut a lot of this.

BobN requested that I explain more of the SuperDoc's travails. I will. Call it a specific instance of how the green and red lines are going to be moving in the next scheduled survey as a result of the last few years of legislative neurosis.

In any case, the Fed is trying to inflate now. The result is much higher oil, and soon to be higher medicine and food costs. And then clothing and the rest.

If the Fed actually pushes this through, they will create another contraction next year. I am losing my religion; I always thought the Fed was at least competent. Will I be left with no illusions at all?

Wednesday, October 06, 2010

The Definition of Discretionary, Revisited

I spent yesterday boiling water (for jello) and basically attending to the Chief. I will be very, very glad when this is over. Before I chauffeur the Chief off to the hospital, here's a few things.

1) ADP Employment report. I am a fan of this report. It is less volatile than the monthly employment report but the curves are generally the same. There are graphs in the report, and I think this month's commentary is worth a read as well. This report tracks only private employment:

A deceleration of employment occurred in all the major sectors shown in The ADP Report and for all sizes of payroll. The September decline in employment followed seven monthly increases from February through August. However, over those seven months, the average monthly gain in employment was 34,000. There simply is no momentum in employment....September’s ADP Report estimates employment in the service-providing sector rose by 6,000 in September, the eighth consecutive monthly gain. This increase was not enough to offset an employment decline in the goods-producing sector of 45,000. Construction employment dropped by 28,000 during September and manufacturing employment declined 17,000, the third consecutive monthly decline.

Commercial paper seems to indicate that the ramp-up in industrial activity has walked through one peak but may be entering a new, smaller ramp:

I thought some of this was autos and trucks, and so far the recent weeks seem to confirm that.

Meanwhile, the poorest Americans spent more as prices for necessities like food and rental housing climbed. Spending rose 5.6% from 2007 to 2009 for the poorest fifth of consumers, the most of any other income group, despite a 5.5% drop in after-tax income to an average $9,956 a household. In some cases, elderly people and others with low incomes dipped into savings or relied on credit to get by....The lowest earners spent 15.4% more on food last year than in 2007, shelling out more for cereals, meat and processed vegetables....Among the poor, rent expenditures increased 5.3%.

This is the face of reality, and it is the reason why cutting Social Security for the poorer third of the aged is a ridiculous proposition. Note the anecdote of the 69 year old who was laid off from her job at 67, who is now getting by on Social Security and a $133 unemployment check.

CPI is grossly understated for the poorest Americans, That means that real Social Security checks have plummeted. The unavoidable expenses (rent or property tax, utilities and fuel, food and medical) have risen far more than discretionary expenses. The drop in restaurant traffic over the last decade seems to be strongly related to older people with less discretionary income.

In part, this problem reaches back to the change in CPI calculations instituted under the Clinton administration. In part, it's just the result of a lousy economy. Price compression doesn't occur evenly - the prices for staples, especially the cheapest staples can and often will continue to rise even while the prices for discretionary items tend to drop.

However, given the price inputs for producers and servicers, we have reached the end of price compression in many markets. I expect wages to be depressed as a result of very scant profit margins and an oversupply of labor.

The reason so many more people over 65 are in the labor force is that they can't make ends meet. If you cut Social Security further for these folks, you will have to replace it with welfare. So you are not actually going to save much or anything for them. Further, to the extent they can get work, they generally will displace younger workers who are starting their working lives. So the result will be poverty for the young and the old.

I disagree acutely with some of the suggestions for reaching a fiscal balance, because they are wildly unlikely to succeed. Delaying full Social Security benefits until 70 is an idiotic idea. It's not clear that the 67 year age (current) is very workable, but 70 definitely won't wash.

What will be required to reach a fiscal balance will be to chop most government programs for the middle and upper class and to divert some funds to the people who really need it, who are mostly in the bottom 25% of the population sorted by income. And they are disproportionately aged. Pretty obviously we will have to deal with the immigrant problem. We are importing labor even while we are suffering an acute unemployment crisis. Not only does this not make sense, it is a recipe for the total collapse of the social safety net. Those pushing this are not humanitarians. They're either people who want to see the entire welfare state collapse, or they're idiots.

At this time I have become acutely hostile toward both the Democratic and Republican party leaderships, because on balance, not only are they refusing to deal with reality but I believe they haven't a clue about reality for the average American. There are some attempts at beginning to address the fundamentals, but the problem is that these attempts aren't really supported by the leadership of either party. It is nice to see WSJ publishing something like this which begins to approach the basic problem.

We are going to have to raise taxes, but the middle class is going to have to sustain a great deal of the increase in taxation. Otherwise, the rich will be taxed out of the country and unemployment will continue to rise.

I believe the rich can and will pay more taxes, but they won't sustain it until we have a workable plan to deal with our overall fiscal problem. Dealing with our fiscal crisis would reward the truly wealthy far more than they would lose with a moderate tax hike, but hiking taxes without really addressing the problem will just move more and more investment out of the country.

Monday, October 04, 2010

Beginning The Week On A Downer

First, sorry I haven't been posting much, but the Chief is going in for a colonoscopy this week, plus we are trying to figure out if his medicines need to be changed. Plus, he had to go off some of his medicine for the colonoscopy, so the upshot is I am playing at-home nurse again.

And then, I have been spending an outsize amount of time on the SuperDoc's regulatory problems. That is an epic saga that would fill a book by itself. I'm going to end up with three books, in reality. It is difficult to fathom how the US government believes it creates jobs by bleeding businesses dry with this nonsense. SuperDoc had to lay off. Most practices are laying off some administrative workers. And that's before the almost 30% cut in Medicare reimbursements which is scheduled to occur at the end of this year.

But on to economics:I really wanted to see the August Manufacturer's Shipments, Inventories and Orders report. It is here, and it is not that great. I am currently focusing more on shipment trends than order trends, because the order trends are going to follow shipment trends for all the feed-through.

From June through August, shipments ran -0.5, +1.2, -0.6. This may not seem significant, but with unfilled orders we are went +0.6, +1.1, -1.1.

Machinery (shipments):+1.4 > -3.2 > +3.7. Yoy YTD this category is only up 5.2%. It is the last category to rebound out of inventory cycles, and yes, it has something to do with fabricated metals. Because right now there should be a benefit to buying under this year's tax treatment than next year's, this category may be getting a temporary bounce. But one would hope not, because it isn't that great!

There is some non-durable strength in pulp and paperboard containers, although paperboard fell in August. And ag chem is still strong. Ag chem is up 41.1% YTD YoY, by far the strongest category. Autos are up about 22% YTD YoY, with trucks up 24.9%.

There is clearly some boggling going on. Page 6 of this report has a nice tabular summary of shipments, new orders, unfilled orders and total inventories by major category. Notice how tightly the consumer goods are chained. Manufacturers haven't overrun demand, which is good. But one can see why they are so cautious also: (This is just new orders):

Last week the personal income and outlays report was published for August. The headline looked good - income +0.5, and real disposable income having rebounded 0.2%, after having fallen 0.2% in July. But the underlying details were discouraging. By far the largest single source of additional income (these numbers are annualized) was personal current transfer receipts (payments to individuals by government). That increased 35.8 billion, of which 20.6 billion was the extension of unemployment benefits. So between July (when unemployment benefits are estimated to have dropped 17.1 billion and real disposable personal incomes fell 0.2% ) and August, unemployment benefits accounted for a big part of the change. You can estimate the rate of change of wages and salaries (growth in jobs and increase in wage and salary payments) from the "contributions" for government social insurance, and they did increase, but by less than the July increase.

Another way to look at this is that taxes (social insurance +3.1 billion and current taxes +7.2 billion) increased at only 1/3rd the rate of payments by the government to individuals. Obviously, this is unsustainable. We are going to have a decent few months in the stores, but basically that's coming from government payments to individuals, and the unemployment benefits are temporary.

Which brings us back to final demand, which is going to be contingent on incomes. In August, private wage and salary payments increased about 26 billion, while government wage and salary payment decreased about 5 billion. So the net increase was about 21 billion. Government payments to individuals increased close to 36 billion, but about 20 billion of the increase was temporary. The rest is probably Social Security/Disability. Staring at a situation in which the long-term welfare payments are increasing at about 4/5ths of the rate of the tax base is pretty scary.

Oh, and the pending home sales report was released. Just take a look at the regional indexes compared to 2009. They are significantly below the 2009 trend in all four areas. We have trouble ahead.

Update: This chart was created from BEA's Personal Incomes Table 2.1, which you can access here. This shows normalized time series for total wages and salaries (doesn't count benefits), private wages and salaries, government wages and salaries, and personal current transfers split into the temporary (unemployment) and Social insurance. I really put this table up for Carl at NOFP, who is just constantly tortured by tax fallacies.

Here you see that the real problem is the constantly rising ratio of benefits. When GDP Q3 data becomes available I'll do a much more comprehensive breakdown. The bottom line is that most of our problem is demographic. Adding a stagnant economy doesn't make anything better, because even if you stop paying extended unemployment benefits (and those drop out in Q1 next year), those unemployed people still won't be earning wages and paying taxes.

You can also see that this problem was clearly evident long before the current downturn.

For those who hate numbers:When you "normalize", you adjust series of different levels to a constant level in order to easily see how they have varied over time in relation to each other. Thus, obviously total wages and salaries are much higher than the social benefits paid, but the normalized series above shows that social benefits have constantly risen in proportion to wages paid, and that they started this epic divergence in the 1990s. The narrowing of the gap at the end of the 1990s really represented a demographic bump relating mostly to the Great Depression. There is also a demographic blip from the Spanish flu (1918-1919). So although most of the public believes that Clinton raised taxes and closed the deficit, almost all of the improvement was really demographic.